HONG KONG, Feb 14 (Reuters) - Hong Kong's de-facto central bank said on Tuesday that it had bought HK$4.223 billion ($538 million) from the market during New York trading hours on Monday to stop the local currency from weakening and breaking its peg to the U.S. dollar.
The Hong Kong dollar is pegged to a tight band of between 7.75 and 7.85 versus the U.S. dollar.
The aggregate balance - the key gauge of cash balances in the banking system - will decrease to HK$91.864 billion on Feb. 15, a Hong Kong Monetary Authority (HKMA) spokesperson said on Tuesday.
The latest move to defend the peg came after HKMA bought the equivalent of $30.9 billion of the local currency from the market in 2022 through 41 rounds of interventions since the U.S. Federal Reserve began hiking interest rates last March.
Such interventions at one point firmed up Hong Kong interbank offer rates (Hibor), including the one-month and three-month tenors, and even exceeded U.S. interbank offer rates of the same tenors in early December. But the rates dropped heading into 2023.
Three-month Hibor fell to 3.42958% on Monday from a peak of 5.4% in December, representing a discount of about 140 basis point below equivalent tenor U.S. Libor, the widest discount in 16 years.
This has revived interest from some investors in borrowing Hong Kong dollars to fund their purchases of higher-yielding U.S. dollar assets, and weighed on the local currency, according to bankers.
"The still-recovering Hong Kong economy and low demand from corporates and individuals for loans has continued to weigh on Hibor. The Hong Kong dollar banking system is flushed with liquidity," said Patrick Wu, co-head of trading for Asia Pacific and the Middle East at Credit Agricole-CIB.
In the fourth quarter of 2022, Hong Kong's economy contracted 4.2% from a year earlier, the second-deepest decline since the second quarter of 2020 when COVID-19 took a toll around the world.
($1 = 7.8499 Hong Kong dollars) (Reporting by Donny Kwok and Georgina Lee; Editing by Leslie Adler and Jamie Freed)
